Where is Africa’s Middle Class, and How Can We End Vulnerability to Poverty?

African nations can look to Nigeria and Tanzania for recent examples of smart policies that boost the middle class. Flag map via www.shutterstock.com

By Yvan Yenda Ilunga

The global financial crisis failed many nations and companies, leading to the collapse of banks and recessions in the biggest economies in the world. But most African countries passed through the storm without experiencing much of a blip.

Many factors deserve credit for Africa’s ability to steer through the credit crunch largely unhurt. One notable factor was the growing number of small businesses in all sectors of the economy across the continent – and more micro-finance institutions to serve them – that helped propel growth and avoid disaster when bigger companies lagged.

Unfortunately, these businesses, such as small-scale local cooperatives in agriculture in the Democratic Republic of Congo, were set up merely as “survival strategies” with a very limited framework. The initiatives were not designed to ensure long-term economic sustainability. Many were intended only to help economies shoulder through the crisis, not spur growth.

But in reality these policies have shown that Africa’s economic growth and development rely and will continue to rely on the fate of small- and medium-sized enterprises (SMEs) – which are too often dismissed as “informal economic activities” that deserve little attention.

A miner enters a house, part of a 2.8 billion rand ($255 million) housing project put together by her employer at the WaterKlooff Hills in Rustenburg September 16, 2014. Mining companies in South Africa have various social policies they are required to implement but this is the first that strives to give miners a shot at owning middle-class homes that for most would otherwise be beyond their wildest dreams. REUTERS/Siphiwe Sibeko

Reliable partners

Tanzania, Zambia and Kenya have taken the lead in proving that small businesses can be reliable partners.

For instance in Tanzania, up to 75% of banks offer substantial loans to SMEs, in contrast to some countries where bankers are still reluctant to trust them.

But small businesses can’t thrive without a strong and growing middle class, something most African countries continue to lack. An increasing body of research shows the link between a vibrant middle class and a healthy economy. It was a key ingredient that fueled European prosperity throughout the 19th and 20th centuries.

Of course, a thriving middle class is necessary for more than just driving economic growth. It’s the only way to lift hundreds of millions of Africans out of abject poverty through inclusive social and economic policies that work for all. African governments must do more to build on the recent successes in increasing entrepreneurship and to pursue policies that lift more of their citizens out of poverty, where too many of them reside.

Data via South African Development Bank Group

Path out of poverty

Sub-Saharan Africa alone has an estimated 218 million residents living in extreme poverty on less than $1 a day, that’s more than one out of every four people.

Beyond the humanitarian calamity, it means a significant share of the population can’t afford to buy commodities at market prices – and can’t help sustain small businesses. Finding a way to lift more of these people out of poverty will increase the size of the consumer market, foster more sustainable entrepreneurial activity and bolster local and regional economic growth.

In fact, a middle class and small businesses go hand in hand, each feeding off of and building the other. One cannot survive and thrive without the other.

On the road to growth

Some progress has already been made.

Africa’s middle class has tripled over the past 14 years as its 11 biggest economies have grown tenfold in the period, according to a study conducted by Standard Bank.

Almost 15 million households are now deemed middle class, up from 4.6 million in 2000, with Nigeria leading the way and east African countries lagging behind. The bank forecast that the middle classes in those 11 countries will swell by another 25 million by 2030. Almost a third of all middle class households by then will be in Nigeria, which is finally diversifying away from oil and growing its telecommunication sector, film industry (Nollywood) and other segments at a grassroots level.

But that still represents just a fraction of the 1 billion Africans – projected to reach 1.9 billion by 2050 – and includes people living on just $15 a day.

In order to capitalize on the demographics and keep the pace of economic growth high, governments need to implement strategies that enhance entrepreneurship, the capabilities of SMEs and the middle class.

Examples of Success

Nigeria leads the way with policies and government programs such as the Micro, Small and Medium Enterprises Development Fund implemented by the country’s central bank. While its main purpose was to support small businesses, it has helped build a Nigerian middle class as well.

South Africa has also succeeded in implementing national policies that promote small-and medium-size enterprises, facilitate economic inclusion while establishing a strong and sustainable middle class.

One of these is the Black Economic Empowerment program, created in 2003 to relieve the inequalities caused by apartheid and facilitate more economic inclusion. It demonstrates the importance of tailoring initiatives at groups that have been marginalized.

Statistics show that there has been dramatic growth in the size of the middle class since apartheid ended in 1994. Back then, South Africa’s middle class was dominated by whites at 69.1%, while Indians made up 18.5%, mixed race or “Colored” comprised 9.1% and Africans just 3.3%. Today, Africans make up 51% of the middle class, followed by whites at 34%, Coloreds at 9% and Indians at 6%.

But that only tells part of the story. While the country’s wealth is being shared more equitably among its many ethnic groups, the overall middle class remains relatively small at about 17% of the population. That’s up from 8.1% two decades ago, but more needs to be done.

Shifting Policies

And here’s where policies that foster thriving entrepreneurship and a growing middle class go hand in hand. To build the former, governments need to implement policies such as project financing and establish skills training centers, which will then support the latter. Small – and medium-sized enterprises are the foundation for a strong middle class.

Too many government policies have instead focused on luring large multinational companies. While they do contribute to overall gross domestic product, research including some data from the World Bank have shown that these multinationals do little to facilitate local economic development. Governments have argued that the benefits of hosting these companies will trickle down and alleviate poverty. But the evidence suggests otherwise. For instance, the sharp contrast between multi-million oil facilities around the Niger Delta and the high level of poverty in nearby rural communities exemplifies the limitation if not failure of the trickle-down economic policy.

Permanent vulnerability

This focus on luring a few large companies has also tended to make these economies over reliant on a single sector of the economy.

Nigeria’s economy, for example, has experienced phenomenal growth in recent years but is now at risk because of plunging oil prices.

This dependency on one or few economic activities has put many African countries in a position of permanent vulnerability. These economies need a broad base to create more sustainable growth for the long term.

In order to avoid such economic vulnerabilities, and in order to build a strong middle-class economy, it is imperative that African governments find ways of formalizing and integrating more small businesses into the “formal economy.”

Private initiatives need to be backed up by a strong political will to support small businesses with subsidies. Such practices will encourage local communities and investors to invest and work with local businesses and ultimately help build the middle class.

The middle class economy in Africa requires a multi-stakeholder approach that includes governments and private ventures. If the right policies are followed, investors will then know that the future and success of Africa’s economy are in Africa’s middle class and the small-and medium-sized enterprises it supports.

Yvan Yenda Ilunga is a Visiting Scholar in The Division of Global Affairs at Rutgers University. This article was adapted from The Conversation. Read the original article here.